USD/CAD drops sharply to 1.3400 as US Dollar tumbles, Canada’s headline CPI rises

The USD/CAD pair witnesses an immense sell-off as the US Dollar weakens ahead of the interest rate decision by the Federal Reserve (Fed). The Loonie asset also faces selling pressure as Statistics Canada reported that the headline Consumer Price Index (CPI) expanded at a pace of 0.4% vs. expectations of 0.2%.

The annual headline inflation accelerated sharply to 4% against the estimates of 3.8% and the former release of 3.3%. The core CPI that excludes volatile oil and food prices expanded nominally by 0.1%, indicating subdued demand for non-durable goods and services. On an annualized basis, the core CPI rose to 3.3%.

Canada’s inflation for August is not expected to force the Bank of Canada (BoC) to deliver one more interest rate hike as the core inflation remains steady, which is generally considered for the monetary policy framework.

Meanwhile, the US Dollar Index (DXY) continues a two-day losing spell as the Fed is expected to skip raising interest rates in its September monetary policy on Wednesday. This would be the second time the Fed is expected to skip hiking interest rates in its historically aggressive tightening spell that started in March 2022.

As per the CME Group Fedwatch Tool, traders undoubtedly see interest rates remaining steady at 5.25%-5.50% after the Federal Open Market Committee (FOMC) meeting on Wednesday. For the rest of the year, traders anticipate almost a 58% chance for the Fed to also keep monetary policy unchanged.

Investors would look for the commentary about rate cuts as the US manufacturing sector is going through turbulent times. US firms are operating at lower capacity and working on achieving operational efficiency by controlling costs through lower inventory due to a deteriorating demand environment.